Commercial prices cool in March

The Scotsman Guide - Victor Whitman - 10 May 2017

Commercial real estate prices generally slowed down in March, while some sectors appear to be losing steam.

Notably, apartment-asset sales prices have decelerated over the year, posting a rare decline for the month. Hotel prices fell over the 12 months for the first time since 2010, according to the Moody’s Investors Service/Real Capital Analytics price indices.

Assets in the struggling retail sector jumped by 1.3 percent in the month, but have gained just 0.2 percent over the 12 months through March, the weakest annual gain of any major sector, Moody’s said. Retail has suffered through a wave of recent chain-store closings at regional malls, including the iconic retailers Sears, Macy’s and J.C. Penney, in the wake of the growing popularity of online shopping and changing consumer tastes.

Moody’s/RCA indices are based on repeat sales of assets valued at $2.5 million or above.

The Moody’s/RCA all-property index rose 0.5 percent in the month and 7.2 percent year-over-year, according to Moody’s Investor Service/Real Capital Analytics.

Over the month, apartment-asset prices fell 0.5 percent, but were up 8.1 percent year over year. The core commercial index, which excludes apartment assets, rose 0.9 percent over the month and 6.8 percent year over year.

Hotel prices declined 1 percent over the past 12 months. Hotel room revenue growth has slowed significantly as more new hotels have come online, Moody’s said.

Office properties posted the highest gains. The office index rose 1.2 percent over themonth and 10.1 percent year over year. Sales prices for offices located in central business districts rose 2.4 percent over the month and 12.5 percent year over year in March, the biggest gain of any commercial asset.

The industrial sector also saw sales prices fall over the month (down 0.3 percent) and over the three months through March (down 0.4 percent). Industrial prices were up 7.6 percent over the 12 months through March, however, Moody’s reported.

CRE loan demand falters?

The slowdown in prices could be a reflection of wider slowdown. The Federal Reserve’s senior loan officer survey released this past week reported that banks have generally tightened their lending standards over the past year, as the commercial real estate (CRE) markets enter the late cycle.

“In doing so, banks cited a less favorable or more uncertain outlook for CRE property prices, capitalization rates, and vacancy rates or other fundamentals as their most important factors,” the Fed reported. “Participants also cited a reduced tolerance for risk as an important reason for tightening CRE credit policies.” The loan officers also generally reported a reduced demand for loans.

The Fed received responses from 72 domestic banks and 20 U.S. branches of foreign banks.

Commercial origination volumes, and the multifamily sector in particular, were solid in the first quarter, the Mortgage Bankers Association reported. The overall volume was up 9 percent year over year, with a rise in loan volume for health care, industrial and most especially multifamily properties, MBA reported last week.

The retail and hotel sectors have been victims of negative headlines, which have fueled investor fears. The multifamily and industrial sectors have been flourishing, however, MBA commercial analyst Jamie Woodwell told Scotsman Guide News last week.

“There have certainly been an awful lot of headlines covering what’s going on in retail, and particularly some of the more negative trends,” he said. “That can have an impact on investor demand for retail properties, which can then flow over to mortgage originations as well.”

MBA has previously forecast that commercial originations will top $500 billion in 2017, an increase from 2016. Those numbers are expected to be revised later this month.